Industry may have to fund investors' compo: Shorten
Financial Services Minister Bill Shorten has urged superannuation funds to consider an industry based solution to providing a safety net for losses in cases of fraud.
The government will also implement recommendations to improve safeguards in the sector, including making investment funds improve their disclosure on indemnity insurance coverage.
The moves are part of a long-awaited response to last year's parliamentary joint committee investigation into the collapse of Trio Capital in December 2009 and a separate review, by Richard St John, of compensation for superannuation investors.
Investors lost more than $176 million when Trio Capital moved money overseas using a network of offshore funds.
While both reports found no systemic problems in the regulation of the superannuation industry, they outlined a series of recommendations including bolstering areas of oversight of funds among regulators and expanding powers to deal with so-called phoenix activity, whereby investment funds can avoid detection by establishing new entities.
Trio's collapse is one of the biggest cases of fraud and theft in Australia's superannuation system to date. It also highlights the inherent risks in the fast-growing area of self-managed superannuation funds.
Mr Shorten said the industry will not be asked to directly contribute to a safety net compensation scheme but he urged the sector to consider under-compensation in cases of fraud or losses. This includes professional insurance schemes to protect retail clients in the event of member insolvency.
"The government will leave open for future consideration the need for a last-resort scheme, which will take account of any residual level of under-compensation after improvements in the industry's conduct standards," he said.
SMSF Professionals' Association of Australia chief executive Andrea Slattery said a number of reforms have happened since Trio's collapse, including the implementation of an insurance scheme for self-managed super fund advisers.
"Trio was a financial services industry wide issue, not an issue limited to one sector of super. It's an area where people have to become more competent and we have to improve the communication between statutory and regulatory bodies, as well as the advice to consumer," Ms Slattery said.
Mr Shorten said the government plans to adopt 13 recommendations of the report into Trio, and he was supporting another nine recommendations in Mr St John's report.
Five recommendations, in the combined reports, will be open for consultation.
Trio's losses were mainly in two hedge funds. The biggest loss - $123 million - was based in the Astarra Strategic Fund, which took investments from both APRA-regulated superannuation funds and self-managed super fund trustees. Another $53 million of losses was in the ARP Growth fund, which attracted investments solely from SMSFs.
Alongside the parliamentary committee's conclusions were findings by a separate Treasury investigation into the regulatory environment in relation to Trio, which was cleared by the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.
Treasury's report found no evidence that would have alerted both regulators that fraud was occurring. Once formal investigations began into the funds APRA and ASIC had acted quickly, it said.
Even so, Treasury's report said there was an "expectations gap" within the superannuation industry about the regulatory responsibilities of APRA and ASIC and their ability to safeguard against all investment risks.
Shadow assistant Treasurer Mathias Cormann said Mr Shorten's apparent lack of urgency about the findings of last year's parliamentary inquiry into the Trio fraud were disappointing.
"He is kicking the can further down the road to take this whole issue beyond the next election, even though actual decisions now would give certainty to investors," Senator Cormann said.
The Treasury report described the Trio fraud as highly complex, with the fund operating through a managed investment scheme.
It said super fund trustees, directors and investors "were continuously deceived" throughout the operation of the fund, particularly about the actual existence of underlying assets and the supposed rates of return on investments.
It was also critical of some financial planners, "who appear to have been influenced by high commissions in recommending their clients into Trio Capital products".
Under the government's "Future of Financial Advice" reforms, commissions paid to planners on products have since been eliminated.
Frequently Asked Questions about this Article…
The government has left the door open to a future industry-wide "last-resort" compensation scheme but is not forcing funds to contribute now. Financial Services Minister Bill Shorten has urged the superannuation industry to consider industry-based solutions and the government will review residual under‑compensation after other conduct improvements are made.
The moves follow investigations into the collapse of Trio Capital in December 2009 and a separate review by Richard St John. Those inquiries exposed major investor losses and recommended stronger safeguards and potential compensation approaches for fraud-related losses.
Investors lost more than $176 million. The biggest loss — about $123 million — was tied to the Astarra Strategic Fund (which took investments from both APRA-regulated funds and SMSF trustees), and roughly $53 million was lost in the ARP Growth fund, which attracted SMSF investments.
No. The government says it will not ask the industry to directly contribute to a safety‑net compensation scheme at this stage. Instead it is urging the sector to consider measures such as professional insurance schemes to address under‑compensation in fraud or insolvency cases.
The government plans to implement a number of recommendations from the Trio inquiry and the St John review, including improving disclosure about indemnity insurance coverage, bolstering oversight by regulators, and expanding powers to tackle "phoenix" activity. Some recommendations will be adopted now and others are open for consultation.
Treasury's investigation found no evidence that would have alerted both APRA and ASIC to the fraud before formal investigations began. It noted that once formal inquiries started, APRA and ASIC acted quickly, but also highlighted an "expectations gap" about the regulators' roles and investors' assumptions about their ability to prevent all investment risks.
The Trio case is highlighted as one of the biggest frauds affecting superannuation and underscores the risks in the fast‑growing SMSF sector. It shows SMSF trustees can be exposed to complex fraud through managed investment schemes and that greater competence, better regulator communication, and adviser protections (like insurance) are important.
The article notes the Trio inquiry was critical of some financial planners who appeared influenced by high commissions when recommending Trio products. Under the Future of Financial Advice reforms, commissions paid to planners on products have been eliminated to reduce that conflict of interest.
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